Negative?
April 30, 2020
–Yesterday stocks powered to new recent highs with SPX around the 0.618 retracement and up 2.7% on the day as Gilead’s test results again show promise. (ESM0 2941.00). However, the sharp-eyed casual observer might have noticed a few inconsistencies. For example, Q1 GDP was -4.8%. Apparently Reuters had originally released it as +4.8%, and the guest on Maria Bartiromo’s show ran with it, gushing about the surprising strength in the economy for about 2 minutes before realizing it was a negative number. Didn’t say, “this must be a mistake”, just accepted the incorrect report on its face. On the other hand, if I said that Hertz and Chesapeake are about to declare bankruptcy, which they are, you might hesitate to grasp that stocks soared yesterday. As friend Brent C mentioned, red eurodollars have never been above the 9975 strike (1/4 of one percent) but yesterday EDH21 and EDM21 settled 9975 and EDU21 at 74.5. Sign of a V-shaped recovery? Um, NO. In yesterday’s note I mentioned the Short red May midcurve 9975 straddle which settled 4.5. Perhaps that focused someone on risk versus level, because there was a short covering buyer of about 40k of the 0EK 9975c for 3.0 (OI fell 30k) and the straddle settled 6.0 vs 9975 with two weeks to go.
–What IS supportive of financial assets is the drop in 3m libor which set yesterday at 68.6 bps. In March it reached a high of 145 bps as credit concerns washed over the market. But going into the FOMC meeting, the comfort of all the Fed’s extraordinary palliative actions has numbed the risk and pressed libor down. The Fed avoided raising IOER, which caused FFK0 to be the star performer on the day, rising 3.25 bps to 99.9575 or 4.25 bps. The Fed effective rate has been setting at 4 bps. I suppose EFFR is on its way to zero. Shrug. Now we’re in the negative yield discussion. It’s like one of my bad long option positions. It can only GO TO ZERO, right? I’ll just pull the ostrich routine and bury my head in the sand. Continuing along the same thread of negativity, a friend sent a copy of an S&P ‘Consultation’ asking for input on index pricing with respect to negative commodity prices. It’s getting a little out of hand. Do we simply accept these concepts? When I was a kid, my mother would send me and my big brother out on Christmas eve with 2 dollars to buy a Christmas tree. Because THAT’S when we could afford to buy a tree. So we walked a few blocks in the cold to a barren lot and my brother offered the guy 1 dollar for a tree. I was probably 6 and my brother was 9 or 10. And the guy said he was going to get the chainsaw out and destroy that tree before giving it to us for a dollar. That stuck with me. I think he might have relented and sold us the tree. But when you have unwanted inventory you hold it, or destroy it, or let it rot. If we told the guy to PAY us to take the tree away he might have used the chainsaw on us. Anyway, I don’t think negative prices for financial assets should be allowed.
–Ten year yield rose 1.4 bps yesterday to 62.2. Two year yield fell by a similar amount to 19.5; a small steepener. In dollars, near contracts outperformed as well. New high in EDM0/EDM1 one-year calendar to -8 bps. That is the most inverted one-yr calendar on the curve. Sept/Sept is -3, Dec/Dec -3.5 and from there, all positive. Jobless Claims today.
